Economics of Sequestering Carbon in the U.S. Agricultural Sector

Increasing the quantity of carbon sequestered-or stored-in soils
is an alternative to reducing atmospheric emissions of carbon and
other greenhouse gases (GHG) in the context of an overall strategy
to mitigate global climate change and its impacts. Under relatively
constant management and environmental conditions, rates of carbon
additions through photosynthesis and of carbon emissions through
decomposition tend to equilibrate and the amount of organic carbon
in soil stabilizes at a new equilibrium. Since wide-scale
cultivation began in the 1800s, the stock of carbon in U.S.
agricultural soils has declined, on average, by about one-third.
Soil science studies have estimated the technical possibilities for
sequestering additional carbon. This study explores the economic
potential of sequestering additional carbon in the U.S.
agricultural sector by providing farmers with incentives to expand
the adoption of land uses and production practices that increase
the quantity of carbon stored in soils and vegetation.

What Is the Issue?

In February 2002, the President directed the Secretary of
Agriculture to develop recommendations for incentives to encourage
adoption of production practices and land uses that extract carbon
from the atmosphere and sequester it in soils and vegetation.
Economics of Sequestering Carbon in the U.S. Agricultural Sector
examines the economic implications of carbon-based incentives that
might be used to expand such land uses and production practices in
the U.S. farm sector. Two primary issues are addressed:

How much of the estimated "technical" potential for additional
carbon sequestration is economically feasible?

How cost effective are alternative incentive structures that
might be used to encourage carbon- sequestering activities?

How Was the Study Conducted?

To assess the economic potential to sequester carbon in the farm
sector, we adapted the ERS U.S. Agricultural Sector Model (USMP) to
include sequestration and emissions parameters associated with
switching into and out of land uses and production practices that
build carbon levels in soils and vegetation. From the
sequestration/emission parameters, we could implement alternative
designs for carbon-based incentive payments to farmers. The three
sequestering activities studied were afforesting croplands and
pasture, shifting cropland to permanent grasses, and increasing the
use of production practices (particularly no-till) and rotations
that raise soil-carbon levels. Model simulations were run
reflecting 15-year sequestration contracts for four alternative
payment designs and six alternative payment levels for additional
sequestered carbon. Estimates of carbon sequestration potential are
developed for payment structures with asset price payments, which
compensate farmers for (presumed) permanent carbon sequestration,
and with rental price payments, which compensate farmers for
storing carbon for a finite time period.

What Did the Study Find?

Agriculture can provide low-cost opportunities to
sequester additional carbon in soils and biomass. At a
price of $10 per metric ton for permanently sequestered carbon, the
ERS model estimates that from 0.4 to 10 million metric tons (MMT)
of carbon could be sequestered annually; and at $125 per ton, from
72 to 160 MMT could be sequestered, enough to offset 4 to 8 percent
of gross U.S. emissions of greenhouse gases in 2001.

The different sequestration activities become
economically feasible at different carbon prices. The
model predicted that farmers would adopt cropland management
(primarily conservation tillage) at the lowest carbon price, $10
per metric ton permanently sequestered carbon, and would convert
land to forest as the price rose to $25 and beyond. The model
predicted farmers in most regions would not convert cropland to
grassland up through a $125 carbon price, in part because
conversion to forest was more profitable with its higher
sequestration rate per acre.

The estimated economic potential to sequester carbon is
lower than previously estimated technical possibilities.
Soil scientists have estimated that increased adoption of
conservation tillage on U.S. cropland has the technical potential
to sequester as much as 107 MMT additional carbon annually. The ERS
model estimates economic potential by factoring into farmers'
adoption decisions the tradeoff between the additional costs of
sequestering practices relative to the additional returns from per
ton carbon payments. We estimate that farmers could sequester up to
an additional 28 MMT by adopting conservation tillage on additional
lands at the top carbon price studied, $125 per ton. For the other
activities studied-afforestation and, particularly, conversion to
grassland-the estimated economic potential also was less than the
previously estimated technical potential.

Incremental sequestration from agricultural activities
can continue for decades. Conversion to conservation
tillage could sequester additional soil carbon for 20-30 years, at
which point a new equilibrium level of soil carbon will be
attained. But carbon may be released relatively rapidly if farmers
shift back to conventional tillage. Additional sequestration from
afforestation may continue for many more decades, depending on
region, species of trees, and harvest decisions.

Payments for carbon sequestration may exceed their value
if sequestration is not permanent. To have the same
greenhouse gas mitigation value as a unit of carbon emissions
reduction, a unit of additional carbon sequestration must remain
stored in soils or biomass permanently. If a subsidy program makes
per ton payments equal to the value of permanent sequestration,
overpayments will occur if subsequent changes in land use or
management practices release carbon back into the atmosphere-unless
compensation is adjusted for the releases. "Rental" payment
mechanisms, which pay farmers to store carbon for specific periods
by maintaining carbon-sequestering practices, can help avoid this
problem, particularly for contract renewals after the period when a
new equilibrium level of soil carbon is reached and no more carbon
is being added to the soil.

An incentive system that includes both payments for
carbon sequestration and charges for carbon emissions may be
substantially more cost effective than a system with payments
only. For example, at a carbon price of $125 per ton for
permanently sequestered carbon, changes in tillage practices
account for an estimated 7 MMT of additional sequestered carbon
with a rental payment system that includes both payments and
charges. Annual government expenditures for storage of this carbon
during the 15-year contract period total $300 million. In contrast,
when the incentives include only carbon payments, a price of $125
per ton results in half the sequestered carbon (3.5 MMT), while
annual government expenditures increase tenfold to $1.5
billion.

Adding a cost-share subsidy does not appear to improve
the cost effectiveness of incentive systems. A 50- percent
cost-share for cropland conversion to forestry or grasslands would
increase sequestration at low carbon payment levels but not at high
payment levels. The implications for cost at the different prices
per ton are minimal.